✓ Board-verified
Business Studies · 2023 · 3 marks
CBSE 2023 · Region 2 · Set 3 · Q24
(a) Explain any three functions of stock exchange.
(a)
Explain any three functions of stock exchange.
OR
(b)
State any three factors determining the choice of
an appropriate capital structure of a company.
Marking-scheme solution
Functions of stock exchange
:
(i) Providing liquidity and marketability to exiting
securities
(ii)
Determining the prices of securities
(iii)
Ensuring safety of transactions
(iv)
Contributing to economic growth
(v)
Spreading of Equity Cult
(vi)
Providing scope for speculation
Factors determining the choice of an appropriate
capital structure :
1. Cash flow position must be considered to meet fixed
payment obligations associated with debt.
2. The higher the Interest Coverage Ratio (ICR), lower
shall be the risk of company failing to meet its interest
payment obligations.
3. A higher Debt Service Coverage Ratio (DSCR)
indicates the company’s potential to increase debt
component in its capital structure.
4. If the Return on Investment(RoI) of the company is
higher than the interest on debt,its ability to use debt
is greater.
5. A firm’s ability to borrow (cost of debt) at a lower
rate increases its capacity to employ higher debt.
6. A higher tax rate makes debt relatively cheaper and
increases its attraction vis-à-vis equity.
7. Cost of Equity increases when debt is used beyond a
certain point.
8. Floatation cost of raising various resources may also
affect the choice between debt and equity.
9. If a firm’s business risk is lower, its capacity to use
debt is higher and vice versa.
10. If a firm uses its debt potential to the full, it loses
flexibility to issue further debt.
11. Debt normally does not cause a dilution of control
while a public issue of equity may reduce the
managements’ holding in the company.
12. Every company operates within a regulatory
framework provided by the law, so the relative ease
with which the norms can be met may have a bearing
upon the choice of the source of finance.
13. If the stock markets are bullish, equity shares are
more easily sold whereas during a bearish phase, a
company may opt for debt.
14. A useful guideline in the capital structure planning is
the capital structure of other companies in the same
industry.
More from Financial Markets
- From the following, identify the one which is a function of stock exchange:2024
- Veena received ₹ 40 lakhs as a gift from her father. She was discussing various avenues of investing her money with her brother. He advised Veena to…2025
- ‘Capital Market instruments are riskier both with respect to returns and principal repayment as compared to Money Market instruments.’ This…2023
- Keeping in mind the emerging nature of the securities market in India, Securities and Exchange Board of India was entrusted with the twin task of…2023
- ‘Neo Appliances Ltd.’, a company known for its innovative kitchen devices was established in 2001. Over the years, the company performed well and the…2026
- Which of the following statements is? incorrect2023
- Differentiate between Capital Market and Money Market on the basis of: (i) Investment outlay (ii) Instruments (iii) Safety OR State how the following…2026
- The process of holding securities in electronic form is called dematerialisation. Which of the following statement does not relate to…2023
CBSE Class 12 Business Studies past-paper question from the 2023 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.